Several years ago the Bush Administration created a series of tax cuts to try and spur along the economy. The resulting tax cuts put more money in the pockets most Americans, but the majority of those tax cuts are set to expire at the end of 2010. Some of the cuts will be supported in Congress and may be extended, but overall there are some serious changes in store for all taxpayers. The expiration of the Bush tax cuts is not only going to affect the wealthiest of Americans. Even Joe Taxpayer will feel the pinch if the tax cuts are left to expire without the intervention of President Obama and Congress.
How Expiring Bush Tax Cuts Affect Taxpayers
For families across the nation, higher tax bills are on the horizon. The only way to prepare for the inevitable is to understand what is going on. Here is a list of the major changes coming your way:
Expect Higher Tax Rates for Everyone
Many people believe that only the top tier of tax brackets will face higher income tax rates when the tax cuts expire, but that is not the case. If Congress does not take action, the marginal tax rates will go up across the board. Right now there are six tax brackets coming in at 10%, 15%, 25%, 28%, 33%, and 35%. If the tax cuts are not extended, these six brackets will be replaced by the pre-2001 tax levels, which featured the following five tax brackets: 15%, 28%, 31%, 36% and 39.6%.
Projected 2011 Marginal Tax Rates
The following chart is the projected marginal tax rates for a single tax payer if the Bush Administration tax cuts are allowed to expire. Those for married individuals see a similar rise, although married filing jointly may also pay the marriage penalty tax (see below for more information).
|Taxable Income||2010 Tax Rate||2011 Tax Rate|
|$0 to $8,500||10%||15%|
|$8,500 to $34,550||15%||15%|
|$34,550 to $83,700||25%||28%|
|$83,700 to $174,650||28%||31%|
|$174,650 to $379,650||33%||36%|
|$379,650 and above||35%||39.6%|
Expect a Phase-Out Rule for Personal Exemptions
Before the tax cuts were in place, a phase-out rule eliminated the personal deductions of a higher-income individual. Unless Congress steps in, personal exemptions will phase out for higher income earners and they will be required to pay more taxes. In 2010, personal exemptions were $3,650, and they should be similar next year. If your adjusted gross income goes over $252,000 for joint filers, $168,000 for singles, $210,00 head of household, or $126,000 married, filing separate, then you can expect a big tax hike in the coming tax year.
Expect a Phase-Out Rule for Itemized Deductions
Before the Bush tax cuts, a phase-out rule would have eliminated up to 80% of deductions for higher income individuals who claim itemized deductions like mortgage interest, local and state taxes, and charitable donations. The phase-out rule was eliminated in 2010 but is expected to return. Taxpayers who have adjusted gross incomes above $170,000 ($85,000 for married, filing separately) will be affected by this phase out rule.
Expect Higher Capital Gain and Dividends Taxes
Currently, the maximum federal rate on capital gains and dividends is 15%. In 2011, the maximum rate will increase to 20% on long-term gains and for dividends the rate will jump to 39.6%. President Obama has promised to keep the maximum rate at 20% but there are no guarantees until the new tax laws are voted on and passed.
Expect Marriage Penalties
The standard deduction for couples who are married and file jointly is double the amount for single filers. The Bush tax cuts held provisions to ease the marriage penalty, which previously forced married couples to pay more taxes than when they were single. In 2011, joint filers standard deductions will go back to about 167% of the amount for singles without Congress’s intervention. If no help arrives, married couples in the lower and middle income tax brackets will be paying higher bills.
Expect a Lower Child Tax Credit
The Bush Tax cuts increased the child tax credit from $500 to $1,000 per child. This credit will expire and revert back to $500 per child.
These tax changes are not final
It’s important to note that these are only potential changes to the tax code and they will not be finalized until later in the year. Basically, Congress needs to vote to extend some or all of the tax cuts, or allow them to revert to the previous levels. If Congress does not step in or President Obama does not approve any voted cahnges, the tax bill of almost every American taxpayer will rise next year. Stay tuned. This will be a highly debated topic in Congress this fall.